Company

A company, being an artificial person, cannot generate its

own capital which has necessarily to be collected from
several persons. These persons are known as
shareholders and the amount contributed by them is
called share capital.

Since the number of shareholders is very very large, a

separate capital account cannot be opened for each one
of them. Hence, innumerable streams of capital
contribution merge their identities in a common capital
account called as ‘Share Capital Account’.

Categories of Share

From accounting point of view the share capital of the

company can be classified as follows:
Authorised Capital:
Authorised capital is the amount of share capital which a
company is authorised to issue by its Memorandum of
Association. The company cannot raise more than the
amount of capital as specified in the Memorandum of
Association. It is also called Nominal or Registered
capital. The authorised capital can be increased or
decreased as per the procedure laid down in the
Companies Act. It should be noted that the company
need not issue the entire authorised capital for public
subscription at a time. Depending upon its requirement,
it may issue share capital but in any case, it should not be
more than the amount of authorised capital.

Issued Capital:
It is that part of the authorised capital which is actually
issued to the public for subscription including the shares
allotted to vendors and the signatories to the company’s
memorandum. The authorised capital which is not
offered for public subscription is known as ‘unissued
capital’. Unissued capital may be offered for public
subscription at a later date.
Subscribed Capital:
It is that part of the issued capital which has been
actually subscribed by the public. When the shares
offered for public subscription are subscribed fully by the
public the issued capital and subscribed capital would be
the same. It may be noted that ultimately, the subscribed
capital and issued capital are the same because if the
number of share, subscribed is less than what is offered,
the company allot only the number of shares for which
subscription has been received. In case it is higher than
what is offered, the allotment will be equal to the offer.
In other words, the fact of over subscription is not
reflected in the books.
Called up Capital:
It is that part of the subscribed capital which has been
called up on the shares. The company may decide to call
the entire amount or part of the face value of the shares.
For example, if the face value (also called nominal value)
of a share allotted is Rs. 10 and the company has called
up only Rs. 7 per share, in that scenario, the called up
capital is Rs. 7 per share. The remaining Rs. 3 may be
collected from its shareholders as and when needed.
Paid up Capital:
It is that portion of the called up capital which has been
actually received from the shareholders. When the
shareholders have paid all the call amount, the called up
capital is the same to the paid up capital. If any of the
shareholders has not paid amount on calls, such an
amount may be called as ‘calls in arrears’. Therefore,
paid up capital is equal to the called-up capital minus call
in arrears.

Uncalled Capital:
That portion of the subscribed capital which has not yet
been called up. As stated earlier, the company may
collect this amount any time when it needs further funds.

Types of Shares

1.Equity Shares:
Before studying equity shares as a source of long-term
finance, it will be better to understand the meaning of
the term ‘share!
Capital that is mobilised by issuing shares is called Share
Capital, Information maxinum amount of capital to be
obtained by issuing shares is mentioned in the
Memorandum of Association of each company. It is
called Registered Capital. This registered capital is
divided into small units of a given amount. Each small
unit of the registered capital is called a share. For
example, if the registered capital of the company is ?
1,00,000 and the same is divided into 10,000 equal parts
of ? 10 each, then each such ten-rupee part is called a
share.

2. Preference Shares
Long-term and medium-term financial needs of the
company are met by preference shares. As compared to
equity shareholders, the following two preferences are
accorded to preference shareholders:

(1) Dividend is paid to them prior to equity

shareholders. Rate of dividend paid to the
preference shareholders is predetermined.
 (2) In the event of a company facing liquidation, it is
the preference shareholders who are paid back
their capital in preference to equity shareholders.

Types of Preference Shares:

Preference Shares:
If the preference shareholders are entitled to get their
shares converted into equity shares after the lapse of a
fixed period, then such shares are called convertible
preference shares.

Non-convertible Preference Shares:

When the preference shareholders are not entitled to
get their shares converted into equity shares, then such
shares are called non-convertible preference shares.

Cumulative Preference Shares:

Rate of dividend on preference shares is fixed. If a
company earns no profit in any year, then the dividend
due for that year is paid along with the dividend of next
year. In this way, dividend of all those years goes on
accumulating when no dividend is paid due to
inadequate profit.

Non-cumulative Preference Shares:

Holders of this type of preference shares are not entitled
to dividend in arrears. In other words, their yearly
dividend is not accumulated. The shareholders will get
dividend only for the current year when the company
earned profit, arrears are not payable.

Participating Preference Shares:

After making payment of dividend to the equity
shareholders at a given rate, those preference shares
which are entitled to get additional dividend (having
already received once dividend at fixed rate) out of the
residual profit are called participating preference shares.

Non-participating Preference Shares:

Those preference shares which are not entitled to
receive additional dividend, out of the residual profit.
The amounts to be transferred to capital
reserve when forfeited shares are reissued;
and prepare share forfeited account:

Share Fortified A/c. Dr.

To Capital Reserve A/c
(Transfer of Share Forfeiture A/c to Capital Reserve A/c)
 Journal Entries :
Issue and Redemption

(A) Issue of Debenture for Cash:

The issue procedure with regard to debentures is the
same as that of shares. The amount due on debentures
may be paid in installments, such as, Application,
Allotment and Calls. When debentures are issued at
premium, the amount of premium is credited to
Debenture Premium Account. Debenture Premium
Account is a capital profit and is transferred to Capital
Reserve Account.

When debentures are issued at discount, the amount of

discount is debited to ‘Discount on Issue of Debentures
Account. The amount of discount should be shown on
the asset side of the Balance Sheet, under the head
‘Miscellaneous Expenditure, until written off.
(B) Issue of Debentures for Consideration other than
Cash:
C. Issue of Debenture as Collateral Security:
A Company can issue debentures to serve as collateral
security for a loan or for Bank Overdraft. A collateral
security can be realised by its possessor if the original
loan is not paid on the due date. Such Debentures are
by nature a contingent liability against the issuing
Company though they become a definite liability in the
event of the breach of the agreement. The holder of
such Debenture is not entitled to any interest. On the
payment of the concerned loan, such Debenture
reverts back to the Company.

There are two ways to deal such issue of Debenture in

the books of accounts:

(A) No entry need be made in the books of accounts.

However, a note is made in the Balance Sheet. For
instance, Indian Limited secures an overdraft for
Rs 1, 00,000 from the Bank by depositing
Debentures worth Rs 1, 50,000 as collateral
security.
This will appear in the Balance Sheet as follows:

Discount on Debentures:
The loss on issue of Debentures – Discount on Issue of
Debentures or Premium Payable on Redemption –
appears in the Balance Sheet. This is because they are
losses – treated as Capital Losses. It is a fictitious asset
which must be written off as early as possible.
There are two methods by which the loss or discount on
issue of Debenture Account is to be written off:

(a) Equal Annual Writing off of Debenture Discount:

When debentures are to be redeemed after a fixed
period, say 5 years, then the amount of discount on
issue of debentures can be transferred to Profit and
Loss Account by equal instalments. For example, a
Company issued 1,000 Debentures of Rs 100 each at a
discount of Rs 2,000. Then the amount of discount to
be transferred to Profit and Loss Account is Rs 400 i.e.
2,000/5.

(b) Writing off the Discount when Debentures are

Paid Back by Instalments:
When the debentures are repaid by instalments, the
amount to be written off each year should be in
proportion to the amount outstanding against
debentures.
 1. Redemption Out of Profits:

When debentures are redeemed out of profit, it is

essential that an equal amount to the face value of the
debentures redeemed will be transferred to Debenture
Redemption Reserve Account. When all the
debentures are redeemed, the Debenture Redemption
Reserve Account is closed by transferring to General
Reserve Account.

The following journal entries will be passed:

2. Redemption Out of Provision:

Rosy Limited had Rs 3, 00,000 5% debentures

outstanding on 1st April, 2003. On that date the
Debenture Redemption Fund stood at Rs 2, 50,000
represented by Rs 2, 95,000 3 per cent (2005) loan of the
Government of India. The annual instalment added to
the Debenture Redemption Fund was Rs 41,150.

On 31st March, 2004 the balance at bank was Rs

70,000. On that date the interest on investments was
received, the investments were sold at 83 per cent net
and the debentures were paid off.
Show necessary Ledger Accounts for the year ended
31st March, 2004.
 3. Redemption by Conversion:

Sometimes debentures are redeemed by conversion i.e.

old debentures are exchanged for new debentures or
shares. In certain cases, a Company, instead of
redeeming their debentures in cash, may offer the
Debenture holders fresh debentures or shares in
exchange for the old ones. If the terms are attractive, the
Debenture holders may agree to the proposal and then
the debentures are said to have been redeemed by
conversion.

The entry is:

Debit Old Debentures Account
Credit the New Debentures/Shares Account